Compensation & Benefits in United States.

Navigating employee compensation and benefits in the United States requires a deep understanding of a complex, multi-layered legal system. While some regulations are set at the federal level, employers must also comply with a diverse range of laws at the state and even city level. A competitive and compliant benefits package is essential for attracting and retaining top talent in the U.S. market.

Compensation laws in the United States

The Fair Labor Standards Act (FLSA) is the primary federal law governing wage and hour requirements. However, state and local laws often impose additional obligations on employers. Key federal requirements include:

• Minimum wage: The federal minimum wage is USD 7.25 per hour. It is critical to note that most states, and many counties and cities, have established higher minimum wages. Employers must pay the highest applicable rate (federal, state, or local).

• Overtime: Non-exempt employees must be paid 1.5 times their regular hourly rate for all hours worked over 40 in a workweek. The classification of an employee as exempt or non-exempt is determined by specific federal and state tests related to job duties and salary level.

• Payroll taxes: Employers are required to withhold and/or pay several payroll taxes. Under the Federal Insurance Contributions Act (FICA), employers must withhold Social Security and Medicare taxes from employee wages and pay a matching employer portion. As of 2025, the Social Security tax is 6.2% (on earnings up to an annual limit), and the Medicare tax is 1.45% (on all earnings). These rates are subject to annual government review.

• Record-keeping: The FLSA mandates that employers maintain accurate records of employee wages and hours worked.

Termination and severance

There is no federal requirement for severance pay upon termination. However, it is a common practice, particularly for executive or long-tenured employees, and may be governed by company policy or an employment agreement. If offered, severance agreements must comply with laws like the Age Discrimination in Employment Act (ADEA).

Statutory employee benefits in the United States

Contrary to common belief, U.S. employees are entitled to several legally mandated benefits funded through employer contributions and payroll taxes. These form the foundation of the social safety net.

• Social security and medicare: These federal programs provide retirement, disability, survivor, and healthcare benefits for eligible workers and their families, funded by FICA taxes.

• Unemployment insurance: A joint federal-state program, funded by employer taxes (FUTA and SUTA), provides temporary financial assistance to eligible workers who lose their jobs through no fault of their own.

• Workers' compensation: This is a state-mandated insurance program that provides wage replacement and medical benefits to employees injured on the job. Requirements vary significantly by state.

• Family and Medical Leave Act (FMLA): For eligible employees at companies with 50 or more employees, the FMLA provides up to 12 weeks of unpaid, job-protected leave per year for specific family and medical reasons, such as the birth of a child or a serious health condition.

• State-mandated paid leave: A growing number of states and cities have enacted laws requiring employers to provide paid sick leave and/or paid family and medical leave (PFL). These programs have specific accrual, usage, and funding rules that require careful compliance.

Supplementary benefits in the United States

To be competitive, nearly all U.S. employers offer a package of supplementary benefits. These are often the deciding factor for candidates choosing between job offers.

• Health insurance: While not a universal mandate, the Affordable Care Act (ACA) requires applicable large employers (ALEs), generally those with 50 or more full-time equivalent employees, to offer affordable, minimum-value health insurance or face potential penalties. Most employers provide a choice of medical, dental, and vision insurance plans.

• Retirement plans: The most common retirement benefit is a 401(k) plan, a tax-advantaged savings plan to which both employees and employers can contribute. Some states have also begun to mandate that employers offer a state-sponsored retirement savings program if they do not offer their own.

• Paid time off (PTO): While there is no federal law mandating paid vacation, it is a standard benefit. Most companies offer a set number of vacation, sick, and personal days, often combined into a single PTO bank. Some states and cities have specific regulations regarding PTO payout upon termination.

If you’re hiring employees in the U.S., you’ll need to make sure you’re staying up to date with all the federal and state requirements for compensation and benefits. On a surface level, the U.S. doesn’t have many laws regarding compensation and benefits for employees — but if you want your company to be able to compete with other employers, you’ll still need to offer certain benefits.

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United States employees vs independent contractors

The U.S. Internal Revenue Service (IRS) and the Department of Labor provide guidelines to determine if a worker is an employee or an independent contractor. The main difference is the degree of control you have over the worker. Generally, you look at three categories:

• Behavioral control: Do you control or have the right to control what the worker does and how they do their job? Employees are typically trained for a specific role and must follow company procedures. Contractors use their own methods and receive less detailed instruction.

• Financial control: Do you control the business aspects of the worker’s job? For example, contractors often have their own tools, cover their own expenses, and are paid a flat fee rather than a recurring salary.

• Relationship of the parties: Are there written contracts or employee-type benefits, like health insurance or paid time off? The relationship with a contractor is usually for a specific project with a defined end date, not a permanent role.

As of March 2024, the U.S. Department of Labor (DOL) also applies a six-factor test under the Fair Labor Standards Act (FLSA), which overlaps with the IRS categories but adds further detail. The DOL’s factors include:

1. Whether the work is integral to the employer’s business

2. The worker’s opportunity for profit or loss

3. The relative investments of the worker and employer

4. Whether the work requires special skill and initiative

6. The permanency of the relationship

7. The degree of control exercised or retained by the employer

Engaging contractors requires careful management to avoid compliance risks. You must ensure contracts are structured correctly, payments are handled properly, and you do not exert the level of control that would define an employer-employee relationship.

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Guaranteed benefits in the U.S.

Generally, in the U.S., employees are not guaranteed any benefits. However, most companies provide benefits packages as incentives to work with them. Most benefits packages in the U.S. include:

• Paid time off in the form of vacation and sick days.

• Medical, dental, and vision insurance plans.

• Retirement benefit plans, such as a pension or 401(k).

Some companies provide additional benefits such as relocation assistance, parental leave, and childcare benefits. Companies in highly competitive industries often offer more benefits as a way to attract top talent.

U.S. benefits management

The employer is responsible for disbursing any locally required benefits and upholding the terms set forth in the employment offer or contract.

Restrictions for benefits and compensation

U.S. compensation and benefits laws can vary from state to state. There are 50 states in the U.S., and they each have their own set of regulations and expectations when it comes to employment. Before hiring in any state, companies should become familiar with local requirements and restrictions regarding benefits and compensation.

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